“High-frequency” securities traders and commodities traders (collectively herein referred to as “traders”) place and cancel many buy and sell orders (collectively “orders”), although some of the placed orders may never be filled. Essentially, the traders place a large number of orders with a goal of making gains, on the filled orders, more than sufficient to cover costs associated with both the filled and the unfilled orders.
Often, the orders are placed according to “algorithmic trading” methods, in which computer systems called “customer servers” monitor market prices, trading activity levels and other real-time data feeds and attempt to identify trades (“buy” or “sell” orders for particular securities, sometimes at particular prices, or cancellations or replacements of previously placed orders) that may be advantageous. The customer servers are often designed to allow traders to take advantage of very short lived market opportunities. Thus, very small latency times (typically measured in milliseconds or microseconds) between the identification of potentially profitable trades and the placement of the orders with exchanges are required, because the real-time data, upon which the trade decisions are made, change rapidly and have very short useful lifetimes.
Most traders are not, however, members of exchanges (also referred to as “venues”), such as the New York Stock Exchange (“NYSE”) or NASDAQ. Consequently, these traders' customer servers cannot place orders directly with the exchanges. Instead, the customer servers are often coupled via computer network links to computer systems called “brokerage servers” operated by or sponsored by brokers who are members of the exchanges. The brokerage servers may multiplex orders from many customer servers and electronically forward the orders to electronic trading systems (“exchange servers”) at the exchanges. A representative brokerage server is described in U.S. Pat. No. 5,864,827, the entire contents of which are hereby incorporated herein by reference.
Such “sponsored” access arrangements may forward orders without restriction, or the brokerage servers may validate the orders to ensure the traders do not violate rules or exceed predetermined limits and forward only orders that are successfully validated. Financial regulatory bodies, in conjunction with clearing brokers, often impose rules and regulations governing securities trading in various asset classes, such as U.S. Equities, options, futures and European Equities. In addition, client and brokerage risk departments may impose a number of restrictions. These restrictions, in aggregate, make up an order validation path within a brokerage server, which may include checks on: human error; open-order exposure; “long” and “short” sale validation; as well as on the aggregate dollar amount of “buy” orders a trader may have simultaneously outstanding, compared to the trader's “buying power.”
Buying power means the amount of cash in the trader's brokerage account, plus an amount of “margin” (i.e., loan) that has been prearranged between the trader and the broker. Brokerage servers typically impose limits on orders placed by traders, such as to ensure the traders do not exceed their respective buying powers. For example, trades that would cause these limits to be exceeded are rejected by the brokerage servers. Brokers are motivated to enforce such rules and regulations, because the trades are made under the brokers' identifications with the exchanges. Consequently, if a limit is exceeded or a trading rule is broken, the broker may be sanctioned.
As noted, some prior art systems involve customer servers coupled via computer networks to brokerage servers which are, in turn, electronically coupled to electronic trading systems at exchanges, largely to reduce latency in placing the orders with the exchanges. However, many traders would prefer an arrangement that involves less latency. Removing the checks performed by the brokerage servers would reduce the latency. However, brokers are reluctant to transact such “naked” orders on behalf of their client traders, because of the risks of exceeding trading limits or violating other rules or regulations.
To speed up order processing and reduce latency, customer servers and brokerage servers typically include high-performance computer hardware. Nevertheless, communication between customer application programs executed by the customer servers on the one hand, and order validation and order routing software executed by the brokerage servers on the other hand, is often slower than desired.